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What Causes an Economic
Recession

For millennia, the people of Britain had been using bronze to make tools and jewelry, and as
currency for trade. But around 800 BCE, that began to change: the value of bronze declined,causing social upheaval and an economic crisis — what we would call a recession today.
What causes recessions? This question has long been the subject of heated debate among
economists, and for good reason. A recession can be a mild decline in economic activity in a single
country that lasts months, a long-lasting downturn with global ramifications that last years, oranything in between. Complicating matters further, there are countless variables that contribute toan economy’s health, making it difficult to pinpoint specific causes. So it helps to start with the bigpicture: recessions occur when there is a negative disruption to the balance between supply anddemand. There’s a mismatch between how many goods people want to buy, how many products
and services producers can offer, and the price of the goods and services sold, which prompts anTedEd-03

What Causes an Economic
Recession

economic decline. An economy's relationship between supply and demand is reflected in its inflation
rates and interest rates. Inflation happens when goods and services get more expensive. Putanother way, the value of money decreases. Still, inflation isn’t necessarily a bad thing. In fact, a low
inflation rate is thought to encourage economic activity. But high inflation that isn’t accompanied withhigh demand can both cause problems for an economy and eventually lead to a recession. Interestrates, meanwhile, reflect the cost of taking on debt for individuals and companies. The rate is
typically an annual percentage of a loan that borrowers pay to their creditors until the loan is repaid.
Low interest rates mean that companies can afford to borrow more money, which they can use toinvest in more projects. High interest rates, meanwhile, increase costs for producers andconsumers, slowing economic activity.
Fluctuations in inflation and interest rates can give us insight into the health of the economy, butwhat causes these fluctuations in the first place? The most obvious causes are shocks like natural
disaster, war, and geopolitical factors. An earthquake, for example, can destroy the infrastructureneeded to produce important commodities such as oil. That forces the supply side of the economy
to charge more for products that use oil, discouraging demand and potentially prompting arecession. But some recessions occur in times of economic prosperity — possibly even because ofeconomic prosperity. Some economists believe that business activity from a market’s expansion canoccasionally reach an unsustainable level. For example, corporations and consumers may borrow
more money with the assumption that economic growth will help them handle the added burden. But
if the economy doesn’t grow as quickly as expected, they may end up with more debt than they canmanage. To pay it off, they’ll have to redirect funds from other activities, reducing business activity.
Psychology can also contribute to a recession. Fear of a recession can become a self-fulfilling
prophecy if it causes people to pull back investing and spending. In response, producers might cut

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What Causes an Economic
Recession

operating costs to help weather the expected decline in demand. That can lead to a vicious cycle ascost cuts eventually lower wages, leading to even lower demand. Even policy designed to help
prevent recessions can contribute. When times are tough, governments and central banks may print
money, increase spending, and lower central bank interest rates. Smaller lenders can in turn lower
their interest rates, effectively making debt “cheaper” to boost spending. But these policies are notsustainable and eventually need to be reversed to prevent excessive inflation. That can cause arecession if people have become too reliant on cheap debt and government stimulus.
The Bronze recession in Britain eventually ended when the adoption of iron helped revolutionize
farming and food production. Modern markets are more complex, making today’s recessions far
more difficult to navigate. But each recession provides new data to help anticipate and respond tofuture recessions more effectively.